EON Emerging Markets Foray to Cut Profit as Russia Slows

Aug. 12 (Bloomberg) -- Germany’s largest utility sought
relief from upheaval in the energy industry at home by investing
in emerging markets. It’s not gone to plan.

EON SE reports first-half earnings tomorrow and ventures in
Brazil, Turkey and Russia are expected to contribute to a 24
percent drop in profit from last year, according to analysts
including B. Metzler Seel Sohn & Co. KGaA.

The company has challenges in all three countries, picked
because they were held to offer better growth than Europe. In
Brazil, investments earmarked for utility Eneva SA have risen
almost fourfold as the business of billionaire partner Eike
Batista collapsed. Earnings at Turkish venture Haci Omer Sabanci
Holding AS have been held back by a weak currency, and Russia’s
economy is slowing because of the Ukraine crisis.

“A higher risk is in the nature of emerging markets,”
said Thomas Deser, a fund manager at Union Investment, a top-10
shareholder, adding EON’s history of investing outside Europe
lagged behind competitors including GDF Suez SA. “Lack of
experience can lead to a lot of expensive errors.”

EON closed down 1.5 percent at 13.165 euros in Frankfurt.

In the first quarter, earnings before interest, taxes,
depreciation and amortization outside the European Union plunged
almost by half to 105 million euros ($141 million). As the
economy deteriorates in Russia, that’s unlikely to have improved
in the second quarter.

Turkey Expansion

Having been involved in Russia since 2007, EON announced
its expansion to Turkey and Brazil five years later. It has seen
the countries as platforms for future growth as Germany’s shift
toward subsidized renewables and away from nuclear cut power
prices already weakened by slow European economic growth.

The investments in Brazil multiplied to about 1.3 billion
euros from the originally planned 350 million euros, in Turkey
they totaled 2.7 billion euros and in Russia about 10 billion
euros, including gas production and the 800 megawatt
Berezovskaya plant to be commissioned next year.

The three countries currently are “no growth driver,”
said Sven Diermeier, an analyst at Independent Research GmbH who
sees political risks in all of them. Brazil and Turkey will
start to contribute to earnings in three years at the earliest,
he said.

In Russia, the Ukraine crisis, which has seen U.S and
Europe impose sanctions on Russian business, may cause energy
demand to drop and weaken the currency, Diermeier said in a
phone interview from Frankfurt.

Driving Force

EON expects “Russia to stay the main driving force for our
Ebitda in non-EU countries”, benefiting from starting
operations in Berezovskaya, spokesman Alexander Ihl said by e-mail. Medium-term in Turkey “we maintain a positive view on the
market as it is getting more and more liberalized” and in the
long-run Brazil has “high potential for growth.”

For first half, EON’s estimated to report a 24 percent
decline in adjusted net income from a year earlier to 1.46
billion euros, according to eight analysts surveyed by
Bloomberg.

The company’s previous international forays haven’t always
paid off. It had to write down billions of euros on assets in
Spain, Italy and France bought from an Acciona SA-led group for
more than 11 billion euros in 2007.

“The negative analogy is that it let itself get carried
away to large-scale investments by growth forecasts and was then
confronted with an economic downturn contrary to its
expectations,” said Guido Hoymann, an analyst at B. Metzler
Seel. “A withdrawal from the emerging markets with losses after
a few short years would be a drama and a waste of resources.”